Question

Describe how professional skepticism will assist in your evidence gathering procedures in payroll fraud

Answer 1

The professional skepticism in a payroll audit can be exercised in following ways:

1. Examining the employees on the payroll: First and foremost thing in a payroll audit is to verify the employees on the roll. Especially the ones who have newly been added and those who have left or removed from the payroll. The addition and deletion of the employees shall be verified with those supporting document evidences. Probability that dummy workers have been added or any employee who have already left the organisation but yet not removed from the roll shall be carefully looked for.
2. Matching of the payroll register with the attendance register: The attendance register keeps track of the record of the presence and the number of hours an employee spends on various tasks within an organisation. These hours shall be matched with those written in the payroll register against the employee. By this any discrepancies ie excess or shortage in pay can be traced. Also throwing the light on leaves or offs can be looked upon here.
3. Confirming of the pay rates: The auditor shall verify if the employees have been paid according to the prescribed wage rates in the system. In the meantime he shall also verify the arithmetical accuracy of these pay rates. Special concentration have to be given when there are promotions or bonus schemes allocated to any employees during the accounting period.
4. Taxes on pay: Salaries and wages of employees are liable for being taxed under the federal or local, social and security, medicare, unemployment taxes qnd also personal income taxes. Some of these taxes also require the employer to contribute their share along with the employees. Hence wages are subject to contributions from the employer and deduction of the employee's contribution. These are done at prescribed rates and so, the auditor has to verify the accuracy these rates in the system. He shall gather documentary evidence of the taxes collected and match them with the totals made in the payroll register. He shall also ensure the these taxes have been paid to the appropriate authorities.
5. Reconciliation: The auditor should match the payroll register with that of the company's business general ledger. If there is any discrepancies the same shall be reconciled and also further investigated. Next he should ask for bank statement and reconcile the payroll register with the amount withdrawn or credited to the employees as per the bank statement. Any amount not paid to the Employees shall be investigated further.